Turkey’s regional incentives program divides various regions of the country into one of six different zones, providing the following benefits to investors: corporate tax privilege; customs tax exemption; Value Added Tax (VAT) exemption; employer’s share insurance contributions support; allocation of investment locations; income tax withholding support; land allocation; and government support for credit interests. The program was launched in 2012 and more detailed information can be found at the Ministry of Economy’s incentives website: https://www.trade.gov.tr/
The incentives program gives priority to high-tech, high-value-added, globally competitive sectors and includes regional incentive programs to reduce regional economic disparities and increase competitiveness. The new investment incentives’ “tiered” system provides greater incentives to invest in less developed parts of the country is designed to encourage investments with the potential to reduce dependency on the importation of intermediate goods vital to the country’s strategic sectors. Other primary objectives are to reduce the current account deficit, boost investment support for lesser developed regions, increase the level of support instruments, promote clustering activities, and support investments that will create the transfer of technology. The map and explanation of the program can be found at: www.invest.gov.tr/en-US/Maps/Pages/InteractiveMap.aspx or http://www.invest.gov.tr/en-US/investmentguide/investorsguide/Pages/Incentives.aspx
Foreign firms are eligible for research and development (R&D) incentives if the R&D is conducted in Turkey. However, investors, especially in the technology sector, say Turkey has a retrograde brick-and-mortar definition of R&D that overlooks other types of R&D investments (such as in internet technologies). Turkey pays close attention to the impact micro-economic factors have on business development and growth and is seeking to foster entrepreneurship and small and medium-sized enterprises (SMEs). Through the Small and Medium Enterprises Development Organization (KOSGEB), the Turkish Government provides various incentives for innovative ideas and cutting-edge technologies, in addition to providing SMEs easier access to medium and long-term funds. There are also a number of technology development zones (TDZs) in Turkey where entrepreneurs are given assistance in commercializing business ideas. The Turkish Government provides support to TDZs, including infrastructure and facilities, exemption from income and corporate taxes for profits derived from software and R&D activities, exemption from all taxes for the wages of researchers, software, and R&D personnel employed within the TDZVAT, and corporate tax exemptions for IT specific sectors, and customs and duties exemptions.
Turkey’s Scientific and Technological Research Council (TUBITAK) has special programs for entrepreneurs in the technology sector, and the Turkish Technology Development Foundation (TTGV) has programs that provide capital loans for R&D projects and/or cover R&D-related expenses. Projects eligible for such incentives include concept development, technological research, technical feasibility research, laboratory studies to transform concept into design, design and sketching studies, prototype production, construction of pilot facilities, test production, patent and license studies, and activities related to post-scale problems stemming from product design. TUBITAK also has a Technology Transfer Office Support Program, which provides grants to establish Technology Transfer Offices (TTO) in Turkey.
Foreign Trade Zones/Free Ports/Trade Facilitation
There are no restrictions on foreign firms operating in any of Turkey’s 20 free zones. The zones are open to a wide range of activities, including manufacturing, storage, packaging, trading, banking, and insurance. Foreign products enter and leave the free zones without payment of customs or duties if products are exported to third country markets. Income generated in the zones is exempt from corporate and individual income taxation and from the value-added tax, but firms are required to make social security contributions for their employees. Additionally, standardization regulations in Turkey do not apply to the activities in the free zones, unless the products are imported into Turkey. Sales to the Turkish domestic market are allowed with goods and revenues transported from the zones into Turkey subject to all relevant import regulations.
Taxpayers who possessed an operating license as of February 6, 2004, do not have to pay income or corporate tax on their earnings in free zones for the duration of their license. Earnings based on the sale of goods manufactured in free zones are exempt from income and corporate tax until the end of the year in which Turkey becomes a member of the European Union. Earnings secured in a free zone under corporate tax immunity and paid as dividends to real person shareholders in Turkey, or to real person or legal-entity shareholders abroad, are subject to 10 percent withholding tax. See the Ministry of Economy’s website: www.ekonomi.gov.tr
Performance and Data Localization Requirements
The government mandates a local employment ratio of ten Turks per foreign worker. These schemes do not apply equally to senior management and boards of directors, but their numbers are included in the overall local employment calculations. Foreign legal firms are forbidden from working in Turkey except as consultants; they cannot directly represent clients and must partner with a local law firm. There are no onerous visa, residence, work permits or similar requirements inhibiting mobility of foreign investors and their employees. There are no known government-imposed conditions on permissions to invest, including tariff and non-tariff barriers.
There are no performance requirements imposed as a condition for establishing, maintaining, or expanding investment in Turkey. GOT requirements for disclosure of proprietary information as part of the regulatory approval process are consistent with internationally accepted practices, though some companies, especially in the pharmaceutical sector, worry about data protection during the regulatory review process. Enterprises with foreign capital must send their activity report submitted to shareholders, their auditor’s report, and their balance sheets to the Turkish Treasury’s Foreign Investment Directorate every year by May. Turkey grants most rights, incentives, exemptions, and privileges available to national businesses to foreign business on a most-favored-nation (MFN) basis. U.S. and other foreign firms can participate in government-financed and/or subsidized research and development programs on a national treatment basis.
Offsets are an important aspect of Turkey’s military procurement, and increasingly in other sectors, and such guidelines have been modified to encourage direct investment and technology transfer. The GOT is reportedly targeting the energy, transportation, medical devices, and telecom sectors for the usage of offsets. In February 2014, Parliament passed legislation requiring the Ministry of Science, Industry, and Technology (MSIT) to establish a framework to incorporate civilian offsets into large government procurement contracts. The Ministry of Health (MOH) established an office to examine how offsets could be incorporated into new contracts. The law suggests that for public contracts above $5 million, companies must invest up to 50 percent of contract value in Turkey and “add value” to the sector. In general, labor, health and safety laws do not distort or impede investment, although legal restrictions on discharging employees may provide a disincentive to labor-intensive activity in the formal economy.
There are no legal requirements for foreign IT providers to turn over source code or provide access to surveillance for encryption, though in practice foreign ICT companies report GOT pressure to localize data, which they view as a precursor to greater GOT access to user information and source code. The recently amended Law #6493 on Payment and Security Systems, Payment Services and e-money Institutions, also requires financial institutions to establish servers in Turkey in order to localize data. Turkish Banking Regulation and Supervision Board (BDDK) is the authority that issues business licenses as long as companies 1) localize their IT systems in Turkey, and 2) keep the original data, not copies, in Turkey. The regulation on data localization resulted in the departure of one U.S. tech company from the Turkish market, and has chilled investment by other possible entrants to the e-commerce and e-payments markets. The law potentially affects all companies that collect private user data, such as payment information provided online for a consumer purchase.
Turkey enacted a new law on Personal Data Protection in April 2016. The law regulates all operations performed upon personal data including obtaining, recording, storage, and transfer to third parties or abroad. For all data previously processed before the law went into effect, there will be a two year transition period. After two years, all data will be rendered either compliant with new legislation requirements or they will be erased or anonymized. All businesses are urged to assess a status analysis of how they currently collect and store data of their employees, customers, and partners to determine vulnerabilities and risks in regard to legal obligations. Secondly, businesses should conduct a compliance analysis to include the use of legal consent forms, staff training, data flow adjustments, security measures to protect data, and revised contractual obligations of those collecting data on a company’s behalf. According to the law, Personal Data Protection Authority with 200 personnel will be established to ensure compliance, lead necessary inspections by ex officio or upon complaint, and ensure that sanctions are properly imposed on the parties who fail to comply. Punishments for violating the law range from one to four years imprisonment or fines of 5,000 to 1,000,000 Turkish Lira.